The events of the last five months or so have brought the discipline of cash flow management even more to the forefront of good, if not essential business management.  It’s well accepted that “Cash is King” and is the lifeblood of a business and the UK Government certainly appreciates this having stepped in with a package of measures in response to Covid-19 to bolster the cash flow of UK Business at a cost of around £200 billion to date and with an overall cost possibly as much as £400 billion by the end of this 2020-21 fiscal year, per Treasury, downside estimates.  Whilst a large proportion of this support has been in the form of non-repayable grants, there has been a huge amount of cash provided to businesses through a combination of loans, tax deferrals and time to pay arrangements be it for VAT, corporation tax, income tax or general payroll taxes.  These deferrals and loans will have to be paid for in the not too distant future commencing with January 2021 for those who deferred their income tax payments on account and March 2021 for those who deferred VAT in the quarter ended 30 June 2020.

The full impact of Covid-19 and the lockdown is unknown but here are some tips on how to manage cash, which have always applied but are even more pertinent given the inevitable squeeze on cash flow being faced by many businesses due to the decline in economic activity and confidence.

1. Bookkeeping and automation

• If you haven’t already done so, consider moving onto a cloud bookkeeping system such as Xero or FreeAgent amongst others as they will give reliable and up to date information on cash held by the business and save cash through efficiencies.
• Key benefits include:
  1. Time saving through automation via direct bank feeds and machine learning.
  2. Having add-ons such as a purchase invoice processing apps that uses optical character recognition such as ReceiptBank or Hubdoc will mean that all your purchase invoices and expense receipts once scanned are automatically entered into Xero and kept in secure cloud storage, which has the added benefit of you not having to maintain hard copies of invoices for the mandatory 6 year period in case HMRC ever want to have a look at them.
  3. Real time reporting whereby you can get an instant view of how your business is performing, crucial to making cash flow related decisions.
  4. Monitoring KPIs through customisable dashboards that can drill into more granular detail when needed with a few, simple clicks of a mouse.
  5. Access to all this information from pretty much any web-enabled device including a mobile phone.

2. Cashflow forecasts

• Look at adding on a cash flow forecasting app to your bookkeeping solution such as Futrli, Fluidly of Float. Once set up they will highlight any peaks and troughs in the amount of cash held by your business in the coming months and years and will highlight whether there’s a funding gap and the need, perhaps to seek finance be it short term or long term.
• It is usually easier to negotiate a better deal on finance when you don’t need it than when you are at the point when it’s critical for business survival.
• Breakeven point should be well understood, i.e. The level of sales revenue you need to achieve, say, each month to break even. This is a good point from which to baseline your growth plans and corresponding cash flow forecasts.

3. Cut costs

• Minimise non-critical expenditure, every little bit of saving helps.
• With the increase in the numbers of people working remotely due to Covid-19, now may be the right time to look at whether you need to maintain the same size of premises pre-lockdown, perhaps downsizing to more of a hub-style operation with hot desking which is likely to be more effective in the “new normal” going forward and will likely save a good amount of money.
• Consider outsourcing certain operational activities rather than dealing with non-core functions internally, freeing up resource to drive business growth, often at reduced costs due to the outsourcers’ economies of scale allowing them to deliver services at, typically, a cheaper cost than keeping it in-house.

4. Customers

• Look at making it easier for customers to pay you, the sooner you get paid the better. Adapt to customer needs and habits and invest in the online experience your customers will encounter.
• Invoice your clients at the earliest commercial opportunity. Leaving it to the the end of the week, or even worse to the end of the month, just delays the cash coming in and is likely costing you in terms of finance costs and other opportunity costs.
• You could encourage early payment with a small settlement discount to customers, often the loss of profit margin on the sale is more than made up for in the positive contribution of having better cash flow.
• Consider operating a system of charging customers with stage payments as you deliver your services or, perhaps, a scheduled monthly service charge rather than billing for everything at the end of a job, this smooths out cash flow and allows you to manage cash flow better. Utilising an app such as GoCardless enables you to automatically collect pre-authorised payments form your customers’ bank accounts whenever your invoice is due.
• Ensure cash flow is optimised with debtors being chased quickly and efficiently using an app like Chaser that automates the chasing mechanism, operating in the background with automated emails to customers; it’s relatively easy to set up and integrates well with many of the leading bookkeeping systems.
• Monitor both your own and your customers’ credit rating. It’s crucial to keep on top of what your credit rating is to ensure you are optimally placed to attract customers and finance.  Ensure you keep a close eye on your customers’ credit worthiness, things can move quickly in the wrong direction in an uncertain climate so limiting your exposure to bad debts is crucial.  It may be possible to take out credit insurance on some of your customers’ balances.

5. Suppliers

• Perhaps don’t pay suppliers as early as before and delay where practicable, this will have a positive impact on cash flow but do factor in maintaining positive relationships, particularly with key suppliers, and being late with certain supplier payments can negatively impact on your business credit rating.

6. Financing

• Look to refinance now whilst credit markets are still fairly liquid, things may tighten up in the future meaning interest rates and charges may go up.
• Look at the usefulness and availability of invoice finance with something like MarketFinance or Satago which connects to your bookkeeping system and can make almost instantaneous credit lines available via its selective invoice discounting product. Essentially you may be able to get up to 90% advance/funding on sales invoices you raise on day one.  When the customer does eventually pay, say, in 30 days’ time that receipt goes directly to the invoice discounter who offsets it against the advance that
• you received and you end up paying an interest charge and a facility management charge for the period of the advance. These types of arrangement are becoming increasingly more commonplace in the normal arsenal of financing options that complement or indeed replace traditional bank facilities such as an overdraft or a bank loan.
• A useful form of asset finance is “sale and lease back” whereby you sell some business assets to a finance company and then lease them back. The cash injection can then be diverted to other business areas.
• The same principle applies when buying new assets i.e. rather than tying up cash with an outright purchase of an asset on day one, you could consider the hire purchase/finance lease or contract hire route, thereby removing a spike in cash flow; remember smoothly increasing cash flow is where you want to be. Interestingly in many cases the tax relief with these different approaches to financing an asset purchase equalises over time so that you are not worse off from a tax perspective, the driver thus being what method best suits from a cash flow perspective.

         7.  Stock & Work in Progress (WIP)

1. Look to get a stock system integrated with your accounting system and try to keep stockholding as lean as possible, the ideal being a “Just in Time” system, but that ideal would require a rock-solid supply chain. Do you need to tie up cash in stock just because of a discount for bulk buying?  Perhaps, it’s a better option in these uncertain times to sacrifice some profitability and forego a discount in order to preserve cash.
2. Keep WIP under constant review and invoice it at the earliest opportunity. Consider using apps such as Workflow Max or simPRO which help you accurately track project costs and WIP build up and facilitate the invoicing of it to customers in a timely manner.

       8. Tax advantaged expenditure and allowances

• There are various HMRC tax advantaged schemes out there. One such scheme is the R&D tax credits that can significantly reduce your tax bill giving enhancements to spend of an additional 130%.  Speak to your accountant as it can be surprising what counts as qualifying expenditure for R&D tax credits.

       9. Equity investment

• If you need a cash injection and have an underlying profitable business, which is just faltering temporarily due to the pandemic, but has a positive overall growth trajectory then you may be in a positon to attract equity investment rather than debt finance. Attracting a cash injection through offering equity will reduce the gearing of a business and not shackle you to fixed repayments of interest and capital as associated with debt finance.  The investor will look to realise their return on the equity investment through future dividends and an eventual sale of the shares in the medium term.  Looking to see if your business qualifies for the SEIS or EIS schemes that offers lots of tax breaks to investors could be a worthwhile exercise in helping to secure equity investment.

       10. Keep an eye on how you are paid/rewarded

• If cash flow is running tight it may be an indicator that profits are also tight, so ensure there are sufficient profit and loss reserves to pay the usual interim dividends by looking at management accounts, be they prepared by your accountant or run off your cloud bookkeeping system. It’s generally more tax efficient to take a combination of a salary and dividends as an owner/director of a business but it may be wise to err on the side of caution and not get into the terrain of voting unlawful dividends, if profit and loss reserves are tight and just stick to the safer ground of paying yourself mainly or perhaps entirely by way of salary.

      11. Protection of business assets

• With the current economic uncertainty it may be worth looking at restructuring your business to protect valuable assets such as property, large cash deposits and other investments, by transferring them out of a potentially litigious trading environment into the safer haven of a newly formed holding company. There are certain tax reliefs that can be employed to prevent any tax charges around reorganising/reconstructing a company.

Conclusion:

• Try to maintain a buffer of at least 3 to 4 months’ worth of outgoings as part of a good cash flow management strategy.
• Without cash, profits do not matter. As the sayings go, “sales are vanity, profits are sanity and cash is the reality”. Having cash will enable you to react to opportunities, make the needed investment to compete and allow you to have a good night’s sleep.
• Remember the occasional cash flow issue is not unusual for most business but if it’s a regular headache then you should seek advice, help is out there.

At Beever and Struthers we have been busy assisting clients understand and access the various funding options out there to bolster their cash flow, including the COVID-19 support measures along with the more established forms of finance.  Having so many clients already operating on a cloud bookkeeping system has facilitated the implementation of useful cash management apps/tools that should equip them well as they steer through the potentially rocky terrain post lockdown.